With this issuance, Denmark becomes one of the first countries in the European Union (EU) to issue a green bond according to the new EU Taxonomy, a set of definitions and criteria the EU has defined for sustainable economic activities. Euronext Securities Copenhagen is proud to have been part of this historical issuance.
According to Martin Wagner Toftdahl, Head of Monetary Policy and Government Debt at Danmarks Nationalbank, the new green government bond will play a critical role in developing a financial market for Denmark’s transition to a green economy. “We believe it’s important that there is a well-functioning green capital market, where investors can find green projects in a transparent and effective manner. The state’s presence on this type of market is essential to its development.”
Setting a high standard by following the EU Taxonomy
As a part of the issuance process, Danmarks Nationalbank and the Danish government decided to follow the recently adopted EU Taxonomy and identify green expenditures based on the EU’s upcoming climate change investment legislation. “To create the necessary transparency, the EU will play a critical role in defining, from a central place, what constitutes a green investment,” Martin Toftdahl comments. “That’s one of the reasons we’ve chosen to place so much emphasis on the EU Taxonomy. Having an established definition will make it easier for issuers and investors alike.”
Choosing to apply the new Taxonomy with this first issuance also ensures that the appropriate framework is in place from the start. “We believe it will be crucial going forward that issuers actively benchmarks themselves against the Taxonomy. For us, being a part of creating a green capital market means that we set a high standard from the beginning, and that we have an issuance that is forward-thinking and takes into consideration the developments just over the horizon,” says Martin Toftdahl.
Creating transparency around green investments
Proceeds from the bond will be used to finance renewable energy production, including wind and solar energy projects, and the green transition of the Danish transport sector. That investors can clearly see how their investment funds are being used is an important aspect of the green bond market, as Martin Toftdahl points out. “With this issuance, we give investors our commitment that we will use the funds generated in the way that is intended. This creates transparency around the state’s investment in green projects. What will be even more important is the reporting that we will provide, where we inform investors about the impact of the green projects we initiate.”
Choosing the right approach for investors
Another key aspect of the issuance process was choosing the right issuance model. “We had considered a certificate model before this, and we had some considerations along the way, where it was helpful to work together with Euronext Securities Copenhagen to find the right approach,” states Michal Christian Nielsen, Chief Dealer, Monetary Policy Operations and Government Debt with Nationalbank. “The entire project required that it could be done within Euronext Securities Copenhagen, so it was important that we worked together to find the right model.”
In the end, Denmark issued the green bond as a twin bond, based on a concept introduced by Germany in 2020. This model supports the green bond’s liquidity and allows investors to switch the 10-year green twin bond to the corresponding, and more liquid, conventional 10-year twin bond on a one-to-one basis. Martin Toftdahl explains the rationale behind their decision. “The Twin Bond model is a well-known and proven model in the market. It was important for us to choose an issuance model that investors are comfortable with, and to ensure the necessary liquidity.”
Best government bond demand since 2008
The first auction for the 10-year green government bond was held on 19 January 2022, and the order book was oversubscribed to a value of DKK 23.5 billion, which was the largest show of interest in a new government bond in over 10 years. DKK 5 billion was issued at the first auction, corresponding to the maximum issuance target for the auction. The bond was listed on MTS Belgium, the professional market for primary dealers, where Danish government bonds are normally traded.
The positive reception bodes well for future green government bond issuances. Contingent upon market conditions, the plan is to issue DKK 15 billion in green bonds this year alone. Martin Toftdahl believes that they have laid a solid foundation for these plans to be realised. “Now we’ve established a framework where we can issue green bonds, and our sense is that this form of issuance is here to stay. There are clearly limits to how much the total size of green bond issuance can be. We still have as our primary focus to maintain the national debt market’s liquidity, particularly in the primary 2-year and 10-year series.”
Financing the transition to a green economy
Bjørn Stendorph Crepaz, Head of Issuance & Issuer Services at Euronext Securities Copenhagen, also believes that the market will see more green bond issuances in the future. “The European Commission estimates that the EU needs to invest an additional €260 billion each year in order to cut carbon emissions by 55% by 2030. That well illustrates the level of investment in green energy projects we will need to see throughout the EU over the next eight years. As a part of the market infrastructure, it’s our responsibility to facilitate green investments and the transition to a more sustainable economy. This is why the Listing business in Euronext is actively creating ESG indices and all four CSDs in Euronext Securities are working actively to support the new requirements around issuance of green bonds. We’re proud to have been a part of this historic issuance and we look forward to working with Denmark and Danmarks Nationalbank on future green government bond issuances.”
ABOUT THE EU TAXONOMY
The EU Taxonomy is a classification system that establishes a list of environmentally sustainable economic activities. By providing a common language and a clear definition of what is ‘sustainable’, the taxonomy aims to create security for investors, protect private investors from greenwashing and help shift investments where they are most needed.
Source: EU taxonomy for sustainable activities
Article source: Green bonds and Danmark er nu klar til at udstede grønne statsobligationer (Danish).